This section of FinAid provides background information concerning
cohort default rates (CDR) and changes enacted by the Higher Education
Opportunity Act of 2009. This discussion is technical and is unlikely
to be of interest to consumers.

Last updated: December 21, 2010

Definition of Default for Federal Education Loans

Section 435(l) of the Higher Education Act of 1965 defines a federal
education loan that is paid in monthly installments to be in default
if the loan is more than 270 days delinquent. (For loans that are paid
in less frequent installments, the threshold is 330 days.) The
regulations at 34 CFR 682.200(b) reflect the statute.

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The 270-day threshold was established by the Higher Education
Amendments of 1998 (PL 105-244) effective for delinquencies occurring
after enactment on October 7, 1998. Before then the threshold was 180
days. The 180-day threshold was established by the Consolidated
Omnibus Budget Reconciliation Act of 1985 (signed into law on April 7,
1986) which changed the definition of a default on federal education
loans from a delinquency of 120 days to 180 days. The rationale for
the changes was that they would reduce default claims, thereby saving
the government money. But the changes also artificially lowered the
cohort default rate.

FFEL lenders have 90 days in which to file a default claim. While they
are encouraged to file the claim as soon as possible after the loan is
more than 270 days delinquent, most wait until near the end of the
claim period in order to maximize the accrued but unpaid interest that
will be paid as part of the claim. A loan technically isn't in default
until the claim is paid, so practically speaking a loan can be up to
360 days delinquent before it is considered to be in default.

The regulations at 34 CFR 668.183(c) define a default as 360 days
delinquent for a loan in the Direct Loan program.

Old Definition of Cohort Default Rate

Under the law as it existed prior to the changes made by the Higher Education
Opportunity Act of 2008, the cohort default rate was defined as the
percentage of borrowers entering repayment in one fiscal year who
default by the end of the following fiscal year. This definition
appears in section 435(m) of the Higher Education Act of 1965. (If a
school has 30 or fewer current and former students entering repayment
for attendance at the institution in a given fiscal year, the
definition combines the current fiscal year with the two most recent
prior years.)

Borrowers who graduate in May usually do not enter repayment until the
start of the next fiscal year, as Stafford loans have a six month
grace period before entering repayment. (The federal government's
fiscal year runs from October 1 to September 30.) So, when combined
with the 360 days before a default occurs, this means that there is
typically only a one year window during which a default can occur to
affect the cohort default rate.

However, borrowers who consolidate their loans lose the remainder of
the grace period. In 2005 many borrowers used the early repayment
status loophole to consolidate their loans during the in-school
period. While Congress subsequently closed this loophole and now
disallows in-school consolidations, there are still a large number of
students who have lost their grace period because they consolidated
the loans and who will enter repayment on their loans shortly after
graduation. However, these students are less likely to default because
they used the loophole to lock in rates as low as 2.88%, and default
rates correlate very strongly with interest rates. But it is also
worth noting that because they will be entering repayment a few months
before the end of the fiscal year instead of at the beginning, the
effective window for a default to occur is narrowed from a year to
only a few months. (Borrowers may still consolidate during the grace
period and will lose the remainder of the six month grace period if
they do so.)

Privileges for a Low Cohort Default Rate

Colleges with low cohort default rates are entitled to a few
privileges:

Section 428G(a)(3) of the Higher Education Act of 1965 waives
the multiple disbursement rule for colleges with a cohort
default rate that is less than 10% for three years in a row.

Section 428G(b)(1) of the Higher Education Act of 1965 waives
the 30-day disbursement delay for first-time first-year
undergraduate borrowers for colleges with a cohort default
rate that is less than 10% for three years in a row.

Section 435(d)(2)(E) of the Higher Education Act of 1965
requires school as lender schools to have a cohort default
rate of less than or equal to 15%. (This was amended by the
Higher Education Reconciliation Act of 2005 (PL 109-171) on
February 8, 2006. Prior to this amendment, the threshold was
10%.)

Sanctions for a High Cohort Default Rate

Colleges with high cohort default rates can lose eligibility for
federal student aid programs as follows:

Section 435(a)(2) of the Higher Education Act of 1965 suspends
eligibility for FFELP loans for the remainder of the current
fiscal year and the two following years for any college with a
cohort default rate of greater than or equal to 25% for three
years in a row. This suspension is appealable. The threshold
was previously 30% in FY1993 and 35% in FY1991 and FY1992.

Section 401(j) of the Higher Education Act of 1965 specifies
that a college is no longer considered an eligible institution
based on high cohort default rates for FFELP and DL loans. A
college that is no longer considered an eligible institution
loses eligibility for federal student aid.

The regulations at 34 CFR 668 subpart M clarify the loss of
eligibility as follows:

34 CFR 668.187(a)(1) lose eligibility for FFEL and DL loans
if the cohort default rate is > 40% in a single year

34 CFR 668.187(a)(2) lose eligibility for FFEL and DL loans
and Pell Grants if the cohort default rate is >= 25% for
each of the three most recent years

34 CFR 668.187(b) the loss of eligibility is for the
remainder of the current fiscal year and next two fiscal
years if not successfully appealed

This is one of the reasons why some community colleges have opted
out of the student loan system. A community college that has a
cohort default rate that is close to the threshold might choose
to stop offering federal education loans in order to preserve its
students eligibility for the Pell Grant.

Changes made by the Higher Education Opportunity Act of 2008

Because of concern about the inadequacy of the current definition,
Congress made changes in the Higher Education Opportunity Act of 2008
(PL 110-315, August 14, 2008).

Section 436(e) expands the cohort default rate window from 2 years
(end of the following fiscal year) to 3 years (end of the second
following fiscal year). The reporting of the new cohort default rate
will begin in FY2012 (i.e., for borrowers entering repayment in
FY2009), but will only be used for sanctions after three consecutive
years of new cohort default rate data are available, meaning that
there will be no sanctions until FY2011's cohort default rate data is
available. Cohort default rate data is typically made available on
September 15, so this means that the new definitions will not be
effective for sanctions until the start of FY2014.

To compensate somewhat for the effect of the change in definition of
the cohort default rate, section 436(a) of the law replaces the 25%
threshold in effect for FY1994 through FY2011 with a 30% threshold for
FY2012 onward. In addition, section 427 of the law indicates that
starting on October 1, 2011 (FY2012), waivers for the multiple
disbursement rule and 30-day delay will have the threshold increased
from 10% to 15%.

Before Congress passed this law, the US Department of Education ran an
analysis of the potential impact of expanding the cohort default rate
window from two years to three years (and four years) on FY2004 cohort
default rates. While this data has never been officially released,
Inside Higher Ed obtained a copy of aggregate data and published
a table summarizing the impact.
A similar article appeared in the
Chronicle of
Higher Education. (A subscription may be required.)
This data suggests that a 3-year cohort default rate window would
increase cohort default rates by 69% overall and by 53% for public
colleges, 57% for private colleges, and 94% for proprietary
colleges. The projected increase for less than 2 year proprietary
institutions was 108%, for 2-3 year proprietary institutions was 97%
and for 4-year proprietary institutions was 88%. The following table
summarizes the increases in the cohort default rates.

Increases in Cohort Default Rates(2-year vs 3-year window)

Institution Type

FY20042-Year Rate

FY20043-Year Rate

PercentageIncrease inDefault Rates

PointIncrease inDefault Rates

Public

4.7%

7.2%

53%

2.5%

< 2-year

5.7%

9.7%

70%

4.0%

2-3 year

8.1%

12.9%

23%

4.8%

4-year

3.5%

5.3%

51%

1.8%

Private

3.0%

4.7%

57%

1.7%

< 2-year

9.0%

18.7%

108%

9.7%

2-3 year

7.4%

12.2%

65%

4.8%

4-year

2.8%

4.5%

61%

1.7%

Proprietary

8.6%

16.7%

94%

8.1%

< 2-year

8.9%

18.5%

108%

9.6%

2-3 year

9.9%

19.5%

97%

9.6%

4-year

7.3%

13.7%

88%

6.4%

Foreign

1.5%

2.5%

67%

1.0%

Unclassified

5.5%

10.0%

82%

4.5%

Total

5.1%

8.6%

69%

3.5%

The US Department of Education released preliminary 3-year cohort
default rates for FY2005, FY2006 and FY2007 to the public on December
14, 2009. The following table summarizes the increases in the cohort
default rates from 2-year to 3-year.

Increases in Cohort Default Rates(2-year vs 3-year window)

Institution Type

FY20072-Year Rate

FY20073-Year Rate

PercentageIncrease inDefault Rates

PointIncrease inDefault Rates

Public

5.9%

9.7%

64%

3.8%

2-year

9.9%

16.2%

63%

6.3%

4-year

4.4%

7.1%

64%

2.7%

Private

3.8%

6.5%

71%

2.7%

2-year

8.7%

16.2%

86%

7.5%

4-year

3.7%

6.3%

70%

2.6%

Proprietary

11.0%

21.2%

93%

10.2%

Total

6.7%

11.8%

76%

5.1%

Increases in Cohort Default Rates(2-year vs 3-year window)

Institution Type

FY20062-Year Rate

FY20063-Year Rate

PercentageIncrease inDefault Rates

PointIncrease inDefault Rates

Public

4.8%

7.7%

62%

2.9%

2-year

8.4%

13.9%

66%

5.5%

4-year

3.4%

5.5%

61%

2.1%

Private

2.6%

4.5%

76%

1.9%

2-year

6.5%

13.2%

102%

6.7%

4-year

2.5%

4.3%

75%

1.8%

Proprietary

9.4%

18.8%

100%

9.4%

Total

5.2%

9.2%

78%

4.0%

Increases in Cohort Default Rates(2-year vs 3-year window)

Institution Type

FY20052-Year Rate

FY20053-Year Rate

PercentageIncrease inDefault Rates

PointIncrease inDefault Rates

Public

4.3%

7.1%

65%

2.8%

2-year

7.9%

13.3%

69%

5.4%

4-year

3.1%

5.0%

61%

1.9%

Private

2.4%

4.2%

74%

1.8%

2-year

6.0%

12.2%

104%

6.2%

4-year

2.3%

4.1%

73%

1.8%

Proprietary

8.0%

17.2%

115%

9.2%

Total

4.6%

8.4%

83%

3.8%

Of colleges with more than 30 students entering repayment, 1.0% of
public colleges (0.3% of 4-year and 1.4% of 2-year), 1.1% of private
colleges (0.6% of 4-year and 5.8% of 2-year) and 14.1% of proprietary
colleges had preliminary 3-year cohort default rates in FY2007 over
30%, representing 14 (2 4-year and 12 2-year), 15 (8 4-year and 7
2-year) and 185 colleges, respectively. 3.1% of public colleges (46), 1.5%
of private colleges (21) and 13.5% of proprietary colleges (177) have
preliminary 3-year cohort default rates of 25% to 30%.

The proprietary colleges exceeding the 30% threshold tend to be among
the smaller campuses. The largest enrollments for colleges with
preliminary 3-year cohort default rates above the 30% threshold in
FY2007 are 5,595 for public 4-year, 9,971 for public 2-year, 2,838 for
private 4-year and 1,634 for private 2-year, and 5,087 for proprietary
colleges. The larger proprietary colleges with multiple campuses have
a variety of tools for reducing their cohort default rates, from
aggressive counseling of students to "averaging down" the rates by
shifting programs from high-default rate campuses to low-default rate
campuses.

Of colleges with more than 30 students entering repayment, 0.1% of
public colleges, 0.1% of private colleges and 2.8% of proprietary
colleges had preliminary 3-year cohort default rates in FY2007 over
40%, representing 1, 2 and 37 colleges, respectively.

The cohort default rate is a ratio of the borrowers defaulting to the
total number of borrowers. A much smaller percentage of the student
enrollment, however, defaults on debt, especially at colleges where
fewer students borrow to pay for their education. The following table
summarizes the ratio of borrowers defaulting to the total enrollment
at the colleges.

Ratio of Number of Borrowers Defaulting to Total Enrollment3-year Default Rate Data

Institution Type

FY2005

FY2006

FY2007

Public

0.7%

0.9%

0.9%

2-year

0.6%

0.8%

0.8%

4-year

0.8%

1.0%

1.0%

Private

0.9%

1.1%

1.2%

2-year

3.2%

3.8%

4.1%

4-year

0.9%

1.1%

1.1%

Proprietary

8.2%

9.5%

10.2%

Total

1.2%

1.5%

1.6%

A total of 215,212 students who attended colleges with preliminary 3-year
cohort default rates above the 30% threshold (and more than 30
borrowers in repayment) in FY2007, representing
0.9% of all college students. 148,760 of these (69.1%) were enrolled at
for-profit colleges, 53,575 (24.9%) at public colleges and 12,877
(6.0%) at private colleges.

A total of 23,498 students who attended colleges with preliminary
3-year cohort default rates above the 40% threshold (and more than 30
borrowers in repayment) in FY2007, representing 0.1% of all college
students. 21,503 of these (91.5%) were enrolled at for-profit colleges,
161 (0.7%) at public colleges and 1,834 (7.8%) at private colleges.

There is some confusion regarding the release date for the new 3-year
cohort default rate data. Section 436(e) of the Higher Education
Opportunity Act of 2008 amended section 435(m) of the Higher Education
Act of 1965 to implement the switch from 2-year to 3-year CDRs. The
language in section 436(e)(2) discusses the effective date and
transition:

EFFECTIVE DATE AND TRANSITION. -

(A) EFFECTIVE DATE. - The amendments made by paragraph
(1) shall take effect for purposes of calculating cohort
default rates for fiscal year 2009 and succeeding fiscal
years.

(B) TRANSITION. - Notwithstanding subparagraph (A),
the method of calculating cohort default rates under section
435(m) of the Higher Education Act of 1965 as in effect
on the day before the date of enactment of this Act shall
continue in effect, and the rates so calculated shall be
the basis for any sanctions imposed on institutions of higher
education because of their cohort default rates, until three
consecutive years of cohort default rates calculated in
accordance with the amendments made by paragraph (1)
are available.

The confusion arises because it is unclear whether the FY2009
reference in paragraph (2)(A) is referring to the cohort year or the
year in which the data is published.

Most likely the FY2009 reference is referring to the cohort year and
not the year of publication, as fiscal year references used to
identify a specific cohort default rate always refer to the cohort
year.
For example, the 2-year CDRs to be published in September 2009 will be
referred to as the FY2007 cohort default rates. Also the use of the
preposition "for" in "for fiscal year 2009" as opposed to the
preposition "in" is more consistent with the use of a reference to
FY2009 as the cohort year. Likewise publication year is more
consistent when referring to a "report showing default data". Cohort
year is much more salient when one is referring to the calculation of
cohort default rates. Finally, if Congress intended for the change to
take effect with regard to a particular publication year they would
have used a date reference and not a fiscal year reference.

Section 436(a)(1)(A) of the Higher Education Opportunity Act of 2008
implements the change from a 25% threshold to a 30% threshold and is
set to begin in FY2012. This is not inconsistent with a October 1,
2014 start date for sanctions because section 435(a)(2) of the Higher
Education Act of 1965 provides that the cohort default rate must equal
or exceed the threshold "for each of the three most recent fiscal
years for which data are available" and this condition wouldn't be
satisfied until 2014.

In addition, consider the conference report on HR4137 as published on
page H7488 of the Congressional Record on July 30, 2008:

The House bill extends the period for which the cohort
default rate is calculated by one additional fiscal year.
The House bill requires the Secretary to calculate and
publish at least once each fiscal year, a report showing
cohort default rates and life of cohort default rates for
categories of institutions of higher education. The House
bill defines ``life of cohort default rate.'' The calculation
of cohort default rates using a three-year cohort default
rate period will begin with fiscal year 2008. Until three
consecutive years of cohort default rates are calculated
using the three-year default period, cohort default rates
will continue to be calculated and penalties assessed using
the two-year default period. Penalties under the three-year
cohort default rate will not apply until data for the fiscal
year 2010 cohort are available.

The fiscal years were later incremented by one in the final enrolled
legislation. This excerpt from the conference report —
especially the last sentence — makes clear that the years in
question are referring to cohort years and not publication
years. Also, the last sentence, when incremented to the FY2011 cohort,
is consistent with sanctions going into effect on 10/1/2014 after
publication of 3-year CDRs for the FY2011 cohort in mid-September
2014.

Commentary

Shares of a proprietary college fell 17% in early 2009 after a SEC
filing in which the company reported that its preliminary cohort
default rate under the old definition for FY2009 (2007 data) would be
9.7% to 15.3% compared with its cohort default rate under the old
definition for FY2008 (2006 data) of 5.5% to 12.9%. This raised
concerns for investors because cohort default rates for proprietary
colleges will likely double under the new definition, meaning that a
15.3% cohort default rate is at risk of being above the 30% threshold
for federal student aid eligibility.

It should be noted that the college based its report on preliminary
data, which is not published by the US Department of Education. The
final data for all colleges will be published by the US Department of
Education in the fall only after the colleges have had a chance to
correct errors in the data. It is not uncommon for colleges to find
errors such as defaulted borrowers appearing twice and to reduce their
default rates by 0.5% to 2.0% during the appeal process.

In addition, the proprietary college reported the range of default
rates for all its schools. Each school's eligibility for student loans
is considered separately, so in a worst-case scenario only a fraction
of the college's schools would lose eligibility.

Generally speaking, if a proprietary college's FY2008 cohort default
rate under the old definition is under 14% it is unlikely to have a
cohort default rate under the new definition that puts its eligibility
for federal student aid at risk. Moreover, even if college's new
cohort default rate is close to the threshold, it has two years in
which to try to reduce its default rate through various default
aversion techniques, such as requiring borrowers to undergo financial
literacy mini-courses and other debt counseling. Colleges with
multiple campuses can also transfer programs from a campus with a high
default rate to a campus with a low default rate in order to dilute
the high default rate by averaging it down. There are a variety of
mitigating factors a proprietary college can use in its appeal, such
as disproportionately serving low income students who are more likely
to default.

If a college is unable to improve the default rates at one of its
schools, the college could always choose to opt-out the at-risk
schools from the federal loan programs in order to preserve
eligibility for the Pell Grant program. Many public community colleges
have already pursued this solution.

(It is ironic that a different proprietary college was the target of a
class action lawsuit for taking steps allegedly to reduce default
rates that are in compliance with the regulations concerning the
return of Title IV aid when a student withdraws. Those regulations are
intended to minimize the debt of students who drop out by requiring
the return of loans before grants, since failure to complete a degree
is a key predictor of default.)

The primary drivers of default are interest rates, graduation rates
and job placement rates.
While federal education loans have had fixed interest rates since July
1, 2006, the FY2007 cohort is the first one with these fixed interest
rates. These rates represent an increase as compared with previous
years variable interest rates. (Borrowers could lock in the variable
rates by consolidating their loans.) So the 6.8% fixed rate in 2006-07
came after consolidation interest rates of 4.75% in 2005-06 and 2.88%
in 2004-05 and 2003-04. Borrowers in the FY2007 cohort would have had
a mix of these rates and would have had average rates that are at
least 1% higher and probably 2% higher than in the FY2005 and FY2006
cohorts. That's enough to have a measurable effect on the default rates.
The default rates would also have increased in FY2007 because of a
decrease in job placement rates due to the recession and credit crisis.

On March 26, 2009, the US Department of Education published
draft national cohort default rates for FY2007 of 6.9%.
This is the first time the US Department of Education has published
unofficial national default rates based on preliminary data.
It is also the first time the US Department of Education has published
separate statistics for FFELP lenders
(7.3%)
and the Direct Loan program
(5.3%).
(Previous comparisons include one by FinAid involving
FY2005 default rate data
and one by Student Lending Analytics involving
FY2006 default rate data.
These analyses yielded default rates that were quite close to the
official figures published by the US Department of Education despite
using a college-level granularity as opposed to a loan-level granularity.)
(The official cohort default rates for FY2007 as published on
September 14, 2009 were somewhat lower than the draft rates at 6.7% national, 7.2% FFEL and 4.8% Direct Loans.)

Coincidentally, Sallie Mae published a comparison of its default rates
with the Direct Loan program on March 26, 2009,
Sallie Mae Helps Students Avoid Negative Impact of Default
that claims that the lender has a 30% lower overall default rate than
the Direct Loan program. Table 1 of the report claims
that Sallie Mae's cohort default rate is 31% lower for public 2-year
schools, 27% lower for public 4-year schools, 52% lower for private
not-for-profit schools, and 19% lower for private for-profit schools.
This analysis is based on the official FY2005
and FY2006 default rate data and uses a methodology that is similar to
the ones used by the FinAid and Student Lending Analytics analyses.

Such comparisons between the short-term cohort default rates for FFELP
lenders and the Direct Loan program are largely meaningless because
each program serves a different mix of schools. For example, the
Direct Loan program has many more four-year public colleges, which
tend to have lower default rates. Comparing the default rates for
the FFEL and Direct Loan program segmented according to level and
control of institution demonstrates default rates that are much
closer. The following table shows the differences according to
institution type (public, private or proprietary). Notice how the
differences between the default rates for the two programs are much
narrower in FY2005 and FY2006 than in FY2007.

Comparison of FFEL and DL Program Default Rates

Institution Type

FY2005 (Official)

FY2006 (Official)

FY2007 (Draft)

FFELP

DL

FFELP

DL

FFELP

DL

Public

4.6%

3.5%

5.0%

3.9%

6.8%

4.5%

Private

2.2%

3.4%

2.3%

3.5%

3.9%

3.7%

Proprietary

8.2%

8.3%

9.6%

9.8%

11.3%

11.0%

Total

4.7%

4.1%

5.3%

4.7%

7.3%

5.3%

The following table shows the distribution of each type of college
within the FFEL and Direct Loan programs for FY2005, FY2006 and FY2007.
Roughly half of the difference between FFEL and DL default rates is
due to the distributions, and the rest is mostly due to the
differences in default rates for public colleges. The 2.0% point
increase in FFELP default rates, as compared with the 0.6% point
increase in DL default rates, may be related to the 23% drop in the
number of FFELP borrowers entering repayment and public and private
colleges. It appears that the colleges that switched from FFELP to
DL included many of those with the lowest default rates.

Distribution of Public, Private and Proprietary CollegesWithin the FFEL and DL Programs

Institution Type

FFELP

DL

FY2005 (Official)

FY2006 (Official)

FY2007 (Draft)

FY2005 (Official)

FY2006 (Official)

FY2007 (Draft)

Public

46.5%

46.4%

45.8%

70.0%

69.8%

71.3%

Private

30.4%

29.8%

25.6%

17.0%

16.3%

15.7%

Proprietary

23.1%

23.8%

28.6%

12.9%

13.9%

13.0%

There are also different utilization rates for the economic hardship
deferment and forbearances in the FFEL and Direct Loan programs. FFELP
lenders encourage borrowers to pursue deferments and forbearances as
an alternative to default in part because the accrued but unpaid
interest in paid as part of a default claim if the borrower ultimately
defaults. The Direct Loan program is less aggressive in encouraging
forbearances and deferments and so is more likely to see an increase
in deferments and forbearances during a recession (as has occurred in
FY2007 and FY2008). Since deferments and forbearances count in the
denominator but not the numerator when calculating default rates, an
increase in deferments and forbearances can suppress an increase in
default rates.

In addition, the income-contingent repayment program is available in
the Direct Loan program but not the FFEL program. Borrowers in the
income-contingent repayment program affect default rates in a similar
manner as deferments and forbearances. Approximately 12% of Direct
Loan borrowers use the income-contingent repayment plan, with 56% of
them having negative amortization (payments below the interest that
accrues) and 45% making a "zero" payment.

The cohort default rates starting in FY2005 are also likely distorted
by the use of the early repayment status loophole to consolidate loans
during the in-school period. Borrowers who took advantage of this
loophole to lock in historically low rates would technically have
entered repayment early and then immediately been subject to an
in-school deferment. They also lost the remainder of their grace
period, which could potentially have shifted them from entering
repayment near the beginning of a fiscal year to near the end of a
fiscal year. So regardless of whether the US Department of Education
counted them as part of the FY2005 cohort or as part of the cohort for
their graduation year, they would have distorted the cohort default
rates for one or more fiscal years. Also, since October 1, 2007, FFELP
lenders have been actively discouraging borrowers from consolidating
their loans because consolidation loans became uneconomic for the
lenders.

The bottom line is that drawing comparisons among loan programs or
lenders on the basis of cohort default rates is meaningless because
any differences likely have more to do with the selection of colleges
within the lender's loan portfolio than the lender's performance in
preventing defaults.

The US Department of Education has published data concerning lifetime
default rates for
FY2007 (November 30, 2007),
FY2008 (December 9, 2008),
FY2009 (December 14, 2009),
FY2010 (December 21, 2010)
and
FY2011 (January 5, 2012).
The Microsoft Word file contains definitions of each measure, while
the PDF document contains the actual data. Note that some of the
definitions are in terms of the number of borrowers while others are
in terms of dollar loan volume or number of loans. Each data release
provides lifetime default rates for five cohorts, with the most recent
cohort year two years prior to the current fiscal year.

The US Department of Education has published data concerning 15-year
lifetime default rates by college type for loans entering repayment in
1995. These default rates are based on loans, not borrowers or
dollars. They include Stafford, Parent PLUS and Grad PLUS loans, but
not Perkins loans. The categorization of colleges is based on the
current participation agreements on file with PEPS. Over the years
some 2-year public and non-profit colleges have shifted to 4-year
designations. The following table shows some statistics concerning the
15-year cumulative lifetime default rates for FY1995.

Recently, roughly 6% to 7% of the total federal student loan portfolio
has been in default, down from around 10% in the 1990s. The following
table shows the percentage of the total loan portfolio that is in
default. This table shows outstanding principal balances
only. It does not include accrued but unpaid interest.

Total Defaulted FFEL and Direct Loan Volume

Fiscal Year(End)

Defaulted Outstanding

Non-Defaulted Outstanding

Total Portfolio

% in Default

2000

$21.50 billion

$202.91 billion

$224.41 billion

9.6%

2001

$21.62 billion

$228.43 billion

$250.04 billion

8.6%

2002

$21.65 billion

$258.18 billion

$279.83 billion

7.7%

2003

$22.84 billion

$292.35 billion

$315.19 billion

7.2%

2004

$23.82 billion

$328.00 billion

$351.82 billion

6.8%

2005

$25.12 billion

$376.46 billion

$401.58 billion

6.3%

2006

$27.65 billion

$413.43 billion

$441.08 billion

6.3%

2007

$31.53 billion

$459.93 billion

$491.47 billion

6.4%

2008

$36.64 billion

$511.81 billion

$548.46 billion

6.7%

2009

$42.64 billion

$581.73 billion

$624.37 billion

6.8%

Other Flaws in the Cohort Default Rate

While the narrow window in the definition of the cohort default rate
was an often criticized weakness, there are still other problems. For
example, deferments and forbearances count in the denominator but not
the numerator in the calculation of the cohort default rate. So a
school (or lender) who is in contact with a borrower could push the
default beyond the three-year window by encouraging the borrower to
seek an economic hardship deferment or a forbearance. (The economic
harship deferment has a three-year clock on eligibility, while
forbearances have a five-year cap.) This is one of the reasons why
medical schools have such low cohort default rates, because medical
students routinely use the economic hardship deferment and
forbearances during their internships, residencies and fellowships.

The new income-based repayment plan allows a zero monthly payment for
borrowers with income under 150% of the poverty line. It effectively
functions like the economic hardship deferment for the first three
years for these borrowers and like a forbearance indefinitely (until
the remaining debt is cancelled after 25 years in repayment).

(Note that a default on a consolidation loan is treated as though it
were a default on the loans that were consolidated for the purpose of
calculating the cohort default rate. So paying off federal education
loans by consolidating them does not wipe the slate clean. However,
consolidating does reset the clocks on deferments and forbearances.)

Students who enroll in graduate school and obtain an in-school
deferment may also be counted in the denominator but not the
numerator.

The cohort default rate is a short-term measure of defaults and can be
influenced by factors beyond the college.s control, such as
unemployment rates and changes in interest rates. A longer-term
measure, on the other hand, is retrospective and does not reflect
current conditions.

There are a few possible approaches toward addressing the flaws in
the cohort default rate measure:

Calculate the percentage of loan dollars instead of the
percentage of borrowers or loans that default. This would yield a
better measure of the financial risk to the federal government.

Divide the dollar loan volume defaulting during the academic or
calendar year (regardless of cohort) by the total dollar volume in
repayment or the total dollar volume outstanding. This yields a
measure that has some of the characteristics of both short-term and
long-term default rate measures and is similar to the measures that
lenders use to evaluate their own performance.

Switch from measuring defaults to measuring non-performing
assets (or conversely, measuring performing assets). This would
include deferments, forbearances and zero-payment loans in the
numerator along with defaults, in addition to the denominator.

(An alternative would exclude deferments and forbearances from the
denominator in addition to the numerator, allowing only borrowers that
have an opportunity to default to be included in the default rate
measure. This wouldn't be as effective a measure as including them in
both the numerator and the denominator because it excludes
consideration of nonperforming assets entirely.)

Calculate the ratio of payments to principal to loan volume in
repayment. This measures progress in repaying the debt and naturally
factors in borrowers who are repaying the debt more slowly because of
difficulty in repaying the debt (perhaps due to overborrowing). This
is similar to measures that calculate performing and nonperforming
assets.

Divide the number of borrowers who default each year by the
total number of students graduating each year.

Use a more direct measure of institutional quality, such as the
percentage of graduates who pass an independent third-party test, such
as the bar for law students and the medical boards for medical school
students.

Differentiate between default rates for at-risk students (e.g.,
low income students and first-generation college students) and
the rest of the student population. For example, calculate separate
default rate measures for Pell Grant recipients and non-recipients.

Use financial metrics that are better targeted at the value-add
of a college education, such as measures of the return on investment
to the student, to the federal government and overall. These metrics
could include the cost per degree attained, education debt to income
ratios, loan payback period analysis and a comparison of the change in
income before and after graduation with the out-of-pocket cost of
education. All of these metrics are in some way focused on comparing
dollars in versus dollars out. This will address the question of
whether a college education is a cost-effective use of funds.

Each of these measures could be disaggregated according to lender or
educational institution to yield a measure of the performance of these
entities.

There are several reports concerning these and other flaws in the
cohort default rate measure: